Tuesday, February 7, 2017

Summers on Trade

The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating "middle class" wages.

...the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties.

... the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd.

There is a debate to be had about the impact of globalisation on middle class wages and inequality. Increased imports have displaced jobs...

My judgment is that these effects are considerably smaller than the impacts of technological progress...

But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements.

...The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers.

Rather the naysayers argue that different demands should be made on other countries during negotiations - on issues including intellectual property, labour standards, dispute resolution or exchange rate manipulation....

In other words, the US was open already in the postwar period. Trade deals ask other countries to take down trade barriers in specific markets, and also to make internal changes, for the US to remain open.

The reason for the rise in US imports is not reduced trade barriers. Rather it is that emerging markets are indeed emerging. They are growing in their economic potential because of successful economic reforms and greater global integration.

These developments would have occurred with or without US trade pacts, though the agreements have usually been an impetus to reform. Indeed, since the US does very little to reduce trade barriers in our agreements, the impetus to reform is most of what foreign policymakers value in them along with political connection to the US.

Trade deals are very useful for many countries, including the U.S. When politicians get demands for subsidies, protection, stifling regulation, or lack of needed regulation, they can point to the trade agreement. That's a good argument for multilateral agreements as well -- look at the broad range of countries that has agreed to behave, not just look at our special deal with one country.

The truth too often denied by both sides in this debate is that incremental agreements like TPP have been largely irrelevant to the fate of middle class workers. The real strategic choice Americans face is whether the objective of their policies is to see the economies of the rest of the world grow and prosper. Or, does the US want to keep the rest of the world from threatening it by slowing global growth and walling off products and people?
Framed this way the solution appears obvious. A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.

If it works, protection only enriches some Americans at the expense of foreigners and other Americans. It is a negative-sum game. If you do not think America's role in the world is to try to send a billion Chinese and Indians back to grinding poverty, to benefit a bit selected American workers and businesses, then you ought not to be a fan.

Larry focuses on the TPP, but the trade agenda is now much larger -- a substantial increase in US trade restrictions, including a return to tariffs, industry - by - industry quantative restrictions, even in violation of trade agreements, and so on.

Larry mentions protectionism in the past, but don't get all nostalgic. That was in the far past, last seen in the universally reviled Smoot-Hawley tariff of the Great Depression. Nobody looks back to that nostalgically as part of "Great" America.

5 comments:

"The key point: whatever you think of the impact of trade and globalization, trade deals are not responsible for stagnating middle class wages."

From a political perspective - it does not matter. That is something that should be obvious to someone like Larry who has spent time inside policy circles. Unless you can get voted in / stay in office on a free trade platform, there is no use getting behind it.

Notice how Hillary Clinton backed off from the TPP when she ran for President?

And for the record, when NAFTA was voted on, it was Democrats (Larry's own political party) that voted heavily against it.

For someone from the rest of the world (not the USA) we don't see the US economy being as open as Americans like to tell themselves. Down here in NZ we're quite focused on access for dairy and beef, and there are quite substantial trade barriers to NZ being able to export into the US.

We usually note that NZ is the lowest cost producer of protein in the world, largely due to a climate that allows pasture fed animals year round (very little factory farming). In turn, this also means that we can ship butter (for example) into the US with a lower carbon footprint that making that butter in the USA. But trade barriers, agricultural subsidies and various other distortions significantly impact our market access.

Not saying that the US isn't in general a free-ish trade nation (certainly as compared to some other countries), but also not the shining beacon that those reading the marketing brochures might think.

This link: http://aic.ucdavis.edu/research1/DairyEncyclopedia_policy.pdf provides a good overview of US trade policy as it relates to dairy. A list of quotas and tariff barriers, plus price controls within the US for milk production. Funnily enough, whilst googling for that information, there were a large number of links to US dairy interests complaining about protectionism in Canada, and unfair industry support in the EU. (To be fair, Canada's policies are even more crazy than US policies)

I think this debate about the efficacy of "trade deals" misses the more important point. Yes, free trade benefits everyone. But only if it is truly "free trade". If you don't have free markets you can not have free trade. Economics 101 tells us that each country should specialize in those goods and services in which it has a comparative advantage and then engage in free and open trade for those things in which other countries have a comparative advantage. If country A has the comparative advantage in producing widgets but Country A's government imposes such costs and burdens on the domestic producers of widgets that the domestic production of widgets is no longer advantageous and the domestic producer then moves to Country B or Country B's domestic producers then produce widgets, how is that "free trade"? The solution, if one is even desired, is not in secret trade deals, but in allowing Country A producers to operate under terms similar to those in effect in Country B.

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About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!